Category: Money tips Release Date: 2007-07-03
January 6, 2006 07:30:39 Central Financial Network
Q: The role and investment in warrants warrants in the end the significance of that?
A: Let's first look at the use of warrants species. Although the warrant outside the mature markets are no longer strangers, but in the Mainland China market was still a new thing. First, the vast number of investors in Mainland China it is necessary to warrant the use of a correct understanding. Warrants are mainly the following three purposes:
â‘?hedging and risk management. According to high-risk, high expected return principles, the goal is to hedge the risk of larger-than-expected rate of return should fall. Risk management goal is to make the level of risk down to an affordable level. Warrants the most important function is that we can and investors hedge the hands of the underlying asset portfolio composition. For example, stock investors are worried that stock prices fell in the hands, you can buy the stock put warrants to hedge their risk.
â‘?arbitrage. Taking into account transaction costs and taxes, after, as long as the prices of warrants do not meet the real asset pricing formula, there is risk-free arbitrage opportunity. Based on the same underlying asset, expiration date and exercise price are the same for call warrants and put warrants that there is a parity between the relationship between the market price if the warrants are not subject to this parity, we can use the "buy low and sell high" risk-free sets Lee.
â‘?speculation. Warrants have a higher leverage ratio, warrants the investment costs only a fraction of the underlying securities investment, and because the C of E T +0 trade has amplified the ability for speculators and speculative gains. Of course, the high-yield associated with high-risk, speculative losses warrants have been magnified, and even the possibility of significant loss of total investment costs.
In the above three usages, generally speaking, first of all warrants for the first purpose, that is used for hedging and risk management, followed for arbitrage, the final use is speculative. Since the Mainland of China is not short selling mechanism, the use of warrants to conduct arbitrage will be a certain extent. Warrants from the Mainland of China trade situation, the speculation has dominated expressed as a huge volume, and the price much higher than its intrinsic value. Can be seen that the main investors in the Mainland of China is to use the speculative features of the warrants, hedging and risk management functions Daoshi been ignored, there was a serious upside, which is obviously not desirable.
Q: How do I play a warrant hedging and risk management function and role?
A: Under normal circumstances, investors own a stock situation, will buy the corresponding stock put warrants to hedge the stock price declines caused by the loss; while short selling the stock when the shares will be subscribed to purchase the corresponding warrants for the stock prices to avoid the losses caused to investors. Since the Mainland of China is not yet a mechanism of short selling, so there will be no short selling phenomena, and this is not the warrants do not work, use of it? Is not like this, do not have a stock investor, if a buyer of the stock subscription warrants, you can play than the direct purchase of the stock but also good results, because the purchase of the warrant does not cap gains, losses they can maintain at the end.
Generally speaking, from the perspective of risk control, with a stock investor, you can buy the stock put warrants to avoid risks, must not to buy the stock subscription warrants, otherwise, would be counterproductive, increase the risk. Of course, the investors warrants to purchase, then, it is best to buy do not have any of the stock subscription warrants to hedge.
In addition to the underlying assets in hedge portfolio, in the daily portfolio management, you can also give full play to the role of warrants in order to further diversify portfolio risk. In the investment portfolio management, warrants than the stock has two advantages: One is the investment cost is small, making the original inability to carry out a spread of investments possible; the other is a subscription warrants, put the points, the opposite of its systematic risk, for portfolio provides a more flexible choice.
However, we generally recommend that investors only about 10% of the portfolio of funds on the warrant, because warrants have a leverage effect, the risk of over-invested in the General Assembly to enlarge. Investors should be based on the ability to determine their risk tolerance to invest in warrants on the funds.
Know how to invest in the use of warrants, we should also understand that warrants traded on the market price is reasonable.
